Is Coca-Cola Consolidated, Inc.'s (NASDAQ:COKE) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Coca-Cola Consolidated's (NASDAQ:COKE) stock is up by a considerable 19% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Coca-Cola Consolidated's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Coca-Cola Consolidated
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Coca-Cola Consolidated is:
37% = US$455m ÷ US$1.2b (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.37 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Coca-Cola Consolidated's Earnings Growth And 37% ROE
Firstly, we acknowledge that Coca-Cola Consolidated has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. Under the circumstances, Coca-Cola Consolidated's considerable five year net income growth of 52% was to be expected.
We then compared Coca-Cola Consolidated's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.9% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is COKE worth today? The intrinsic value infographic in our free research report helps visualize whether COKE is currently mispriced by the market.
Is Coca-Cola Consolidated Using Its Retained Earnings Effectively?
Coca-Cola Consolidated has a really low three-year median payout ratio of 4.2%, meaning that it has the remaining 96% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Moreover, Coca-Cola Consolidated is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.
Conclusion
In total, we are pretty happy with Coca-Cola Consolidated's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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